Taiwan after the election

Kuomintang (KMT) party incumbent Ma Ying-jeou’s larger-than-expected victory in the Taiwanese election in January indicates that the island will continue on its path toward closer economic relations with the mainland. Ma’s previous term saw the signing of the Economic Cooperation Framework Agreement (ECFA) trade accord and further expansion of cross-strait travel.

China Economic Review spoke with Tony Phoo, a Taipei-based economist for Standard Chartered, about what to expect from Ma’s coming term, future trade negotiations and local sentiment on relations with the mainland.

Can you summarize the course of mainland China-Taiwan trade over the last decade?

Mainland China is an increasingly important market for Taiwan. Trade between the two has risen tremendously over the last 10 years or so, and the mainland right now is the most preferred business destination for Taiwanese investors. Investment in mainland China alone represented 70% of Taiwan’s total outbound investment. But we saw more investment from Taiwan into the mainland than the other way around – it was intensely unilateral. When President Ma came to power in 2008, his campaign of normalizing trade investment flows sought to address these imbalances. That has been beneficial to the Taiwanese economy.

Ma won by a margin of 6% in what was expected to be a much closer election. How broad of a mandate is that for strengthening relations with the mainland?

A margin of 6% was a positive outcome. But more importantly, President Ma received more than 50% of the votes, and the KMT, or Nationalist party, has retained its parliamentary majority. Even though that majority has been reduced, they still have more than 60% of seats. If we consider that the pro-mainland China political party makes up 76 of the 133 seats in parliament, this should ensure a more or less smooth passage for President Ma to continue strengthening ties with the mainland.

How wary are people of further integration with the mainland? Will that continue to be a deciding issue in future elections?

It’s not an issue that’s going to go away, at least not in the next four years. Given that Taiwan is heavily geared toward export industries, there’s no running away from the issue. But if you look at the way the votes are being split, it was very clear that voters residing in the southern part of the island are a lot warier of closer integration with mainland China. That is understandable because most of them tend to be farmers, and their livelihood may be impacted if they had to compete with the mainland Chinese.

What is the likelihood that the opposition Democratic Progressive Party (DPP) will reconsider its stance on mainland China after the loss?

For the last two elections, it’s become increasingly clear that they have not made a significant breakthrough with voters who have stronger inclinations to evaluate economic interests over party ideologies. If they were able to close the gap in terms of their China policy to be more in line with the KMT, it would actually increase their chances of regaining power in the next election. This is ongoing though; there are hardcore DPP members that are just ideologically against the idea of mending ties with mainland China.

What are likely to be the other short-term effects of the KMT victory?

The election results show the possibility of Taiwan and mainland China further expanding or exploring closer cooperation in terms of manufacturing. Back in 2010, during the first negotiations on ECFA, 500 items on the mainland side and 200 items on the Taiwan side were given preferential tariff rates. That only represents roughly 15% of Taiwanese exports to mainland China. But there is a possibility that they could start a second round of negotiations where they will seek to expand the list of traded goods on both sides. After the elections, we’re potentially looking at 5,000 traded goods on the Taiwan side and about the same amount on the mainland side as well. That should cover 90% of goods traded between Taiwan and mainland China.

What sectors stand to benefit from ECFA?

Almost everything will be covered under the second round of negotiations. The only exceptions probably will be agriculture. What is really important is the timetable in which these items will be granted zero tariffs. In the CAFTA agreement signed between China and ASEAN, it took 10 years before 90% of items were eventually granted zero tariffs. But in the case of Taiwan and the mainland, the first trade negotiations under the ECFA had a timetable of only three years.

Along with the ECFA, there’s been discussion about the Investor Protection Agreement (IPA). What do you expect to happen with that?

The signing of the agreement would allow for the creation of an arbiter recognized by both Beijing and Taipei, which would be critical for an increase in direct investment in Taiwan coming from mainland China. Through the IPA, investors would have protection and legal recourse to settle a dispute. But more importantly, since Taiwan has opened up to mainland investment, we have not seen what we call an “iconic investment” from mainland China. Given the sensitivity of cross-strait relations, investments are usually from private enterprises, not public ones. IPA could act as a catalyst. We believe it would encourage state-owned enterprises from mainland China to invest in Taiwan. Hopefully, we will have a conclusion to the IPA within the first half of the coming year.

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China Economic Review (CER) has been a dependably independent voice on trends and developments in the greater Chinese economy for a quarter century. Our coverage has won recognition from the Society of Publishers in Asia and is widely read by economists, business leaders, academics and students with an interest in one of the world’s most vibrant and complex developing markets.